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Economic Insight

UK Business Confidence Monitor: National

An authoritative and authentic check on the nation's economic pulse

Q3 2022: The latest Business Confidence Monitor (BCM) shows business confidence falling into negative territory, as companies face a cost of doing business crisis, alongside the cost of living crisis that consumers face. Both input prices and labour costs are rising, and there are also growing challenges with transport and the tax burden, as well as with regulatory requirements and customer demand. While companies continue to experience rising sales, they expect slower growth over the year ahead.

The results are based on 1,000 telephone interviews among ICAEW Chartered Accountants covering a range of UK sectors, regions and company sizes, ensuring a representative picture of the UK economy. The interviewing is continuous and these latest findings are based on the period 25 April to 15 July 2022.

Key points

  1. The Business Confidence Index is back in negative territory, reversing gains achieved during the recovery from the Covid-19 pandemic. All sectors, regions and types of companies are affected.
  2. Businesses face a range of growing issues as demand recovers, in particular skills shortage and staff turnover, followed by transport problems and the tax burden, as well as regulatory requirements. Challenges around skills and transport are especially acute in the Transport, Construction, Manufacturing and Retail sectors. 
  3. In response to rising costs, businesses are increasing their selling prices at a record rate. That has been supported by strong sales growth, but expectations for sales in the year ahead are weakening.
  4. Exports growth is not as strong as domestic sales with Brexit likely to be an important factor. 
  5. These growing trends and challenges are feeding through to profits and investment plans. Competitiveness, and the shifts to digital and green technologies, may be impacted if investment slows.

GDP

  • Supply chain problems caused by the Covid-19 pandemic have been worsened by the Russia-Ukraine war. In the UK specifically, Brexit is adding to the challenges. There is a risk of recession across much of Europe, made greater by elevated gas prices.
  • Household incomes in the UK are being squeezed by higher inflation, prompting large wage claims and rail strikes, with threats of other disputes to follow.
  • The Monetary Policy Committee is raising interest rates, as are other central banks, and financial markets have weakened. In July, the British prime minister resigned.

The global economy is experiencing continuing problems with supply chains as it mostly emerges from the Covid-19 pandemic. The economic recovery is increasing demand for commodities and for manufactured goods, but labour shortages and the Russia-Ukraine war are impeding their delivery. In China, a major exporter, infection rates have remained high, despite the government’s zero tolerance policy towards infections. That has proved economically damaging for China itself as well as its major trading partners.

Russia’s war against Ukraine means that energy prices are particularly elevated, along with some core commodity prices, and gas shortages may cause a recession across mainland Europe. Inflation has risen globally, other than in China, but particularly so in the UK. Personal incomes are mostly not keeping pace with prices, and consumers have reduced savings to be able to afford spending growth. The second half of 2022 is likely to see little growth in either spending or GDP.

With real incomes being squeezed, industrial unrest related to the proposed wage increases is now spreading. Meanwhile, there are delays at airports because of staff shortages, and also delays at ports partly because of post-Brexit customs controls. A dispute between the UK Government and the EU over the Northern Ireland protocol means there is a threat of EU tariff barriers against the UK.

The Monetary Policy Committee has grown more hawkish, and interest rates were raised by 50 basis points in August, in response to the growing inflationary pressures. They also said they expect the UK to fall into recession in the last three months of this year. Financial markets have suffered losses in recent months, and sterling has fallen against the dollar, adding to domestic inflationary pressures. A period of political uncertainty has led to the resignation of the prime minister. Anecdotally, companies report that they are having to continually revise their business plans.

Confidence overall

  • The Business Confidence Index is back below zero, with companies expecting the next 12 months to be tougher than the past 12. All sectors have experienced declines.
  • Declining confidence reflects a range of growing challenges, led by shortages of non-management skills, which have overtaken staff turnover as the most pressing difficulty businesses face. Problems with the availability of management skills are also rising.
  • Regulatory challenges remain a big issue, now joined by difficulties created by the tax burden. Other difficulties that companies face include transport problems, marketplace competition and customer demand.

Confidence has plunged into negative territory, with a Q3 2022 reading for the Business Confidence Index of -5.0, down from a high point of +47 a year earlier. That puts it back where it was, before the successful Covid-19 vaccination programme started in early 2021. Companies expect economic conditions to be more challenging over the next 12 months than over the past year, a period in which they faced persistent problems with renewed lockdowns and other Covid-related challenges. 

The decline, which continues a trend apparent over the past year, affects all sectors. There are some (Transport, Energy, Manufacturing and IT) where there is still a positive balance, but less than in the second quarter, and outweighed by the negative balances in other sectors: Business services, Construction, Property, Wholesale & Retail and Banking, Finance & Insurance.

The declines reflect growing challenges around staff recruitment and retention, particularly the availability of non-management skills, which are a rising source of difficulty for more than twice as many companies in this quarter as a year ago ‒ 44% in Q3 2022 compared with 20% in Q3 2021. These have overtaken staff turnover as the most pressing difficulty businesses face. Problems with the availability of management skills are less widespread, but are also growing strongly.

Regulatory problems continue to be a prominent issue, now joined by widespread difficulties created by the tax burden. This mainly reflects the level of taxes that companies and their customers (the majority of which are themselves businesses) are required to pay. It is likely to be affected by the range of other difficulties that companies face. These include transport problems, which persist at the historically high level that they rose to when the economy first emerged from the Covid-recession.

Marketplace competition and customer demand also remain problematic at a time when companies are having to increase selling prices.

Business challenges

  • Domestic sales have increased very strongly, while export sales a little less so, probably reflecting the impact of Brexit on the ease of exporting. However, expectations about the year ahead have eased.
  • Strong sales growth has contributed to many of the growing challenges companies faced over the past year, such as skills availability. However, those problems are unlikely to ease, even if sales slow.
  • The sales outlook is weakest in the Retail and Property sectors, and strongest for IT & Communications and Energy companies. Higher selling prices are a likely factor.

Many of the growing challenges reflect the difficulties businesses have encountered as they struggle to keep up with the rise in demand, following the gradual removal of Covid restrictions during 2021. Companies’ domestic sales increased by 6.4% in the 12 months to Q3 2022, repeating the previous quarter’s historic high. Before the pandemic the record increase was 5.7% in Q4 2007.

Exports have not been as strong, however, with growth of 3.1% over the last year, which is similar to the rates often experienced before the pandemic. Problems created by Brexit probably explain much of the difference, with potential exporters facing much-increased ‘red tape’, as well as port and transport delays. Indeed, some companies have probably prioritised domestic over export sales, reflecting the UK’s departure from the Single Market. Asia Pacific markets have also been hurt by China’s exaggerated ‘zero-tolerance’ policies towards Covid-19. The US market has been strong, but accounts for only a small share of UK exports.

Furthermore, expectations for sales over the next 12 months have eased slightly in the current quarter, continuing a trend that has been apparent on the domestic side for several quarters now and reflecting issues businesses have been experiencing. Unfortunately, this does not mean that challenges such as skill shortages are likely to decline. At best, they are likely to grow more slowly than over the past year.

Both on the export and domestic sides the sales outlook is weakest in the Retail and Property sectors, with IT & Communications and Energy pulling up the average. The latter probably reflects increases in selling prices at least as much as increases in volumes.

Prices

  • Input price inflation has climbed to its highest rate since the survey began in 2004. Businesses do not expect these cost pressures to ease over the next year.
  • Input prices have risen most sharply in Manufacturing & Engineering and Construction. Businesses in Transport & Storage expect the fastest increases over the next 12 months.
  • In response, businesses have increased selling prices markedly over the past 12 months, with similar rises also planned. Selling price rises have been most pronounced in Construction, Manufacturing & Engineering, Energy, Water & Mining, and Transport & Storage.

Against a backdrop of supply-side problems (both Covid and Brexit related), capacity constraints and a global surge in costs, input price inflation has climbed to its highest rate since the survey began in 2004. In the year to Q3 2022, input prices increased by 4.8%, markedly faster than the previous record-high of 4.2% in Q4 2008. And businesses do not expect these cost pressures to dissipate, with a further 4.7% increase in input costs forecast over the next 12 months.

These cost pressures have been more acutely felt in some sectors than others. In the 12 months to Q3 2022, input price inflation was highest in Manufacturing & Engineering and Construction. Both sectors have been particularly vulnerable to supply-chain disruptions, affecting both raw materials and components. However, over the next 12 months, businesses in Transport & Storage expect the sharpest increase, with input prices expected to rise at the fastest pace for 17 years.

In response to markedly higher costs, and supported by rising sales, businesses have lifted selling prices by a record rate. The year to Q3 2022 saw prices charged to customers rise by 3.1%, almost one percentage point faster than the previous survey record. And with companies expecting cost pressures to persist, a similar 3.0% increase in output prices is planned over the year to Q3 2023. Across sectors, the pace of selling price rises is closely correlated with the pace of cost rises. Construction and Manufacturing & Engineering achieved the sharpest gains in selling prices over the last 12 months. Transport & Storage businesses expect a marginally faster increase in selling prices than other sectors. Businesses in the Energy, Water & Mining sector also expect to lift selling prices at a faster rate than nationally. Cost rises in these sectors are likely to feed through to other parts of the economy.

Employment

  • Businesses are facing substantial labour cost pressures. Average total salaries are rising at a near-record rate, with companies planning similar increases over the next year.
  • The strength of salary growth partly reflects the widespread problems businesses are experiencing over skill availability. This is particularly evident in the Transport & Storage sector.
  • Labour demand remains strong, with businesses intending to raise employment sharply over the next year. However, these plans may amplify current recruitment problems.

As well as rising input costs, labour costs are also increasing markedly for businesses. Annual salary growth in the year to Q3 2022 was 3.4%, the fastest rise since Q1 2008. And a very similar outturn of 3.3% is expected over the year to Q3 2023.

The rise in average total salary growth reflects, in part, ongoing frictions within the labour market. The proportions of businesses increasingly challenged by the availability of management and non-management skills have been exhibiting upwards trends over the last year and are now at record rates for the survey.

Salary growth has been strongest within Transport & Storage over the last 12 months. Staff shortages are likely to be the main factor behind this. Indeed, many major UK airports and airline companies have been cancelling flights and limiting passenger numbers during the peak of the travel season due to a lack of staff. Partly reflecting this, the proportion of businesses citing the availability of non-management skills as a growing challenge is much more widespread in Transport & Storage than any other sector.

Issues with recruitment and faster increases in salaries are a result of the growing demand for labour. Employment growth in Q3 2022 (3.5%) was comfortably at its fastest rate since the survey began. And companies intend to raise their staff levels by a further 3.0% over the next 12 months, something that is likely to exacerbate the current recruitment challenges businesses face.

Investment

  • Businesses continue to increase their levels of capital spending, although the pace of growth here is expected to slow in the year ahead. A similar story is apparent for R&D budgets.
  • Capital investment plans are strongest in Energy, Water & Mining, but growth across all sectors is expected to moderate. R&D growth is forecast to be strongest in IT & Communications, whereas plans are weakest in Retail & Wholesale and Property.
  • Over the next year, investment growth plans are softening, probably in part because businesses expect their profits growth to weaken.

By past standards, capital investment growth remains healthy. Indeed, the year-on-year rise in Q3 2022 of 2.9% is comfortably above the historical average (2.0%). That said, it does appear that annual growth peaked in the previous quarter, and that rates are now beginning to weaken. Businesses also expect a more modest rise in capital investment over the next 12 months of 2.2%.

In comparison to capital investment, growth in Research & Development (R&D) budgets has been more subdued. Year-on-year growth in Q3 2022 was 2.4%, a rate that is only broadly in line with the rises seen in the decade before the pandemic. Like capital spending, companies also plan slower increases in R&D budgets over the next year. Expected weaker growth in both capital investment and R&D may have a negative impact on the competitiveness of businesses in both domestic and international markets. It may also affect their ability to adopt new digital and green technologies.

As has been the case for much of the past two years, capital investment growth remains strongest in Energy, Water & Mining, with the sector under significant pressure to replace aging plants, adopt greener technologies and transition to renewable sources of energy. The sector is also expected to lead in capital investment growth over the next year, although, as in all other sectors, the rises will be slower than current rates. For R&D budgets, IT & Communications businesses have the strongest outlook over the next year, while the Retail & Wholesale and Property sectors expect barely any growth in this area.

A possible reason for the weaker investment plans is the softening of profits growth expectations. Businesses expect a slowdown in profits growth of one percentage point (4.6%) over the next 12 months. Sharp rises in costs, increased uncertainty and more modest sales growth prospects all probably help to explain this. 

Confidence by sector

  • The Business Confidence Index has fallen across all sectors, with Banking, Finance & Insurance and Retail & Wholesale being the most subdued.
  • As well as Property, the growth outlook for domestic sales is weakest in Retail & Wholesale and Banking, Finance & Insurance. Input cost pressures have been strongest in Manufacturing & Engineering and Construction.
  • The availability of non-management skills is a more widespread issue in Transport & Storage than in other sectors, while problems with the tax burden are most prominent in Construction. Businesses in Manufacturing & Engineering and Retail & Wholesale are particularly challenged by transport problems.

The Business Confidence Index has fallen away across all sectors in Q3 2022. The index remains in positive territory in Transport & Storage, Energy, Water & Mining, Manufacturing & Engineering, and IT & Communications. However, Banking, Finance & Insurance is, on balance, the least confident sector.

The weakness in sentiment is partly linked to sales expectations. Along with Property, businesses in Retail & Wholesale and Banking, Finance & Insurance anticipate more modest rises in domestic sales over the next 12 months. Companies in Retail & Wholesale also plan the weakest increases in employee numbers in the year to Q3 2023.

Some sectors have also experienced much stronger rises in input prices than others. Input prices have been increasing at the fastest rate in Manufacturing & Engineering and Construction, with both sectors’ reliance on imports of raw materials making them particularly vulnerable to ongoing supply-chain disruptions. These two sectors expect similarly strong rises over the next year, although the sharpest rises are forecast in Transport & Storage and Energy, Water & Mining.

There are also some marked variations in business challenges across sectors. The availability of non-management skills is much more widespread in Transport & Storage than elsewhere, with staff shortages causing particular disruptions at the UK’s major international airports. This issue has also come to the fore in Construction and Manufacturing & Engineering.

Transport problems (largely caused by staff shortages) are being felt more acutely in Manufacturing & Engineering and Retail & Wholesale than other sectors, while businesses in Construction have seen a marked surge in challenges surrounding the tax burden. Indeed, in Construction the proportion of businesses citing this as a growing challenge is more than double the rate seen nationally. Weaker sentiment in the Banking, Finance & Insurance sector may be linked to marketplace competition being a more widespread challenge than in other sectors.

Confidence by region and nation

  • The Business Confidence Index has fallen markedly across the UK nations and regions. The index is flat for London businesses, while those in Wales and Scotland have the most negative readings.
  • Falling confidence generally reflects rising input and labour costs, rather than demand conditions. In particular, Welsh businesses have the strongest expectations for both input costs and salaries over the coming year. Widespread challenges over staff turnover in Wales helps to explain the latter.
  • Skill availability challenges are most apparent in the East Midlands, as is the tax burden. Transport problems are a major source of difficulty in East of England and Yorkshire & Humber.

The Business Confidence Index has weakened across all UK nations and regions in Q3 2022. Not one part of the UK has a positive index reading. Businesses in Wales and Scotland are the least confident, while London businesses expect no net change in business conditions over the next year.

The ranking of each nation and region on the Business Confidence Index does not appear to be closely related to the sales outlook, in contrast to previous surveys. Despite having one of the weakest readings on the Business Confidence Index, Scottish companies expect the fastest rise in domestic sales over the next year. Companies in London and the West Midlands also anticipate that domestic sales growth will outperform the UK average.

Instead, the weakness in sentiment is likely to be closely linked to input and labour cost pressures. Notably, Welsh businesses expect the sharpest rises in input costs across the UK and they also plan to increase average total salaries at the fastest pace. The latter is probably because the proportion of Welsh businesses increasingly challenged by staff turnover is much higher than elsewhere in the UK. 

The availability of management and non-management skills are both most widespread in the East Midlands, while transport challenges are especially challenging for businesses in the East of England and Yorkshire & Humber. For Welsh businesses the tax burden has surged in prominence, with the issue more widespread there than in any other region except for the East Midlands.

Confidence by business size

  • The weakening of business confidence is apparent across all types of company, although large private companies and Small and Medium Enterprises (SMEs) are, on balance, the least confident.
  • Differences in sales performance across company types is minimal. However, skill availability challenges are much more widespread for large private companies than for other types.
  • Government support remains a widespread challenge for privately owned companies, both SMEs and larger businesses. This is also the case for the tax burden. Late payment issues are much more prevalent for SMEs than for any other type of business.

The pattern of the Business Confidence Index falling from the highs of recent quarters and into negative territory is generally apparent across all types of companies, by size, ownership, and whether they export or not. The index has remained positive for UK listed companies, but only marginally. Large private businesses and SMEs are, on balance, the most downbeat.

Generally, there are only very small variations in sales performance across different company types. This is also true for costs, employment and investment. There are, however, some notable differences in terms of the challenges that different company types are facing.

Issues surrounding the availability of management and non-management skills are by far most widespread for larger private companies. The same is true, but to a lesser extent, for the proportion of businesses citing staff turnover as a growing challenge.

Challenges associated with government support are more prominent for SMEs and larger private businesses than for UK listed companies. This is also true for the tax burden. Another variation is for late payments, with the proportion of SMEs challenged in this area almost double the rate for UK listed companies.

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Using BCM data

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